Financial Planning, Superannuation

Large lump sum death benefits hard to swallow

lump sum death benefits

Large lump sum death benefits can place surviving SMSF members with higher balances in a vulnerable situation, a wealth management expert says.

Large lump sum death benefits from superannuation are creating problems for SMSF trustees and members who are unable to absorb the funds due to caps put in place by the federal government, a wealth management expert has said.

“Because of the government’s decision to place caps on how much money can be held in pension accounts in superannuation, people are finding themselves in an unprecedented and unexpected situation where they suddenly need to withdraw a large amount from a super fund, and find another home for it, all in a short time frame,” HLB Mann Judd wealth management partner Michael Hutton said in a media release.

Citing a scenario where a couple share an SMSF and one of them passes away, Hutton said the SMSF would only retain the amount that could be taken as a pension by the remaining member, which would be capped at $1.6 million. Anything above that amount in the deceased member’s account would need to be paid out as a lump sum death benefit, he noted.

He pointed out this could place the surviving SMSF member in a daunting situation, given the large sum of money involved and the need to make a significant decision at a difficult time.

“Furthermore, they may never have dealt with this kind of issue before. Whether it’s because they have never received a lump sum of any kind, or whether it’s because they weren’t the person in the relationship who dealt with financial matters, this could be something completely unfamiliar and they may not have the knowledge or the skills to manage it,” he said.

He also highlighted the potential for surviving members to have their situation taken advantage of by dishonest people seeking financial gain. Members could avoid being placed in a vulnerable situation by planning an investment strategy in advance that takes into consideration the event of losing their partner, he added.

“It may mean working out a strategy where the surviving partner knows in advance how they will invest any money they receive, so they don’t need to make decisions when it actually happens – for instance, dividing it equally between any existing investments in managed funds,” he said.

“Alternatively, they may decide to use the money to help out children or grandchildren, but this should be done as part of a considered plan that takes all financial aspects and requirements into account, not as a spur-of-the-moment decision at a time of emotional stress.”

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